Citizens and Graziers' Life Assurance Co Ltd v Commonwealth Life (Amalgamated) Assurances Ltd
51 CLR 4221934 - 0802A - HCA
(Judgment by: DIXON J)
Citizens and Graziers' Life Assurance Co Ltd
v Commonwealth Life (Amalgamated) Assurances Ltd
Judges:
Gavan Duffy CJ
Rich J
Starke J
Dixon JMcTiernan J
Subject References:
Corporations
Amalgamation
Agreement under seal
Uncalled capital of old companies
Validity of provisions
Life assurance
Statutory restriction
Legislative References:
The Life Assurance Companies Act 1901 (Qld) (1 Edw VII No 20) - the Act
The Insurance Act 1923 (Qld) (14 Geo V No 29) - s 2(2)
Judgment date: 2 August 1934
SYDNEY
Judgment by:
DIXON J
The Citizens and Graziers' Life Assurance Co Ltd, which was incorporated in 1921 under the law of New South Wales, carried on, apparently on no very large scale, the business of life assurance in various States, including Queensland. The Commonwealth Life Assurance Society Ltd, also incorporated in New South Wales, carried on another such business in various States, not including Queensland.
In 1926, the companies arranged a union of their businesses. Meanwhile the Queensland statute governing life assurance companies (The Life Assurance Companies Act of 1901), which contained many of the provisions of the English Acts of 1870, 1871 and 1872, had been amended by The Insurance Act of 1923. The amendments included a provision (s. 2 (2)) forbidding any company, not carrying on life assurance business within Queensland at the date of the passing of the Act, to commence to transact life business or carry on such business in Queensland, unless, by the constitution of the company, its net profits are exclusively divisible among its policy holders. Neither of the businesses which were to be combined was conducted on mutual principles, and the Queensland enactment, therefore, stood in the way of any form of union which included a transfer of the business of the Citizens and Graziers' Co to the Commonwealth Society, or to a new company. The third course of transferring the business of the Commonwealth Society to the Citizens and Graziers' Co, and making such changes in the latter's name and constitution as might be required, did not commend itself to the parties. A plan was adopted, which, while avoiding any transfer of the Queensland life business, enabled each of the promoting companies to remain in existence and retain its separate identity. A new company was formed and registered in New South Wales. It was named "The Commonwealth Life (Amalgamated) Assurances Limited." Ample power was taken in its memorandum of association for acquiring the whole or part of the insurance business of any other company, and upon any terms and conditions. Although neither the memorandum nor the articles of the new company contained any express reference to the proposed transaction, the articles dealing with directors were apparently directed to it. Persons who were in fact nominees of the promoting companies were named by the articles as the first directors, and a provision was made entitling a company whose business might be acquired by the company to nominate to its board a director or directors according to the terms of acquisition. When the new company had been registered, an agreement between it and the two promoting companies was prepared, the leading principles of which are (1) that the Commonwealth Society should transfer to the new company its business for a price to be fixed by valuation, and to be applied in taking up shares in the new company; (2) that the Citizens and Graziers' Co should transfer to the new company its business, except its life business in Queensland, at a price to be fixed by valuation, and to be applied in taking up shares in the new company; (3) that the Queensland life business of the Citizens and Graziers' Co should continue under the conduct and control of that company, but that, for a further consideration, the new company should receive the net profits arising therefrom; (4) that the new company's four directors should be nominated, two by the Citizens and Graziers' Co and two by the Commonwealth Society, and of these latter, for three years, one should be chairman with a casting vote; (5) that the shares in the new company taken up by the promoting companies in satisfaction of the sums respectively payable to them by way of price should be registered either in their respective names, or in those of nominees not exceeding seven in number, who should not transfer them without the consent of all the directors nominated by the two promoting companies; (6) that the new company should be entitled, if it should require it, to the benefit of the uncalled capital of the promoting companies, issuing to each of them its own share capital for the amount paid over.
This agreement was duly executed under the seals of the three companies. The substance of the provisions contained in s. 14 of the British Life Assurance Companies Act 1870 is in force in Western Australia, South Australia, Victoria and Queensland, but not in New South Wales. (See s. 37 of the Life Assurance Companies Act 1889 of Western Australia; s. 40 of the Life Assurance Companies Act 1882 of South Australia; s. 461 of the Companies Act 1928 of Victoria; and s. 30 of the Life Assurance Companies Act of 1901 of Queensland.) These provisions forbid the amalgamation of two or more life assurance companies, or the transfer of the life assurance business of one company to another, unless the sanction of the Court is obtained. Application for sanction were made to the Supreme Courts of the three first-named States, which confirmed the transaction as an amalgamation of the Citizens and Graziers' Co and the Commonwealth Society save as to the life assurance business in the State of Queensland of the former company. No application for sanction by the Supreme Court of Queensland appears to have been considered necessary. At any rate, none was made. Except in that State, the new company took over the assets of the two promoting companies and the conduct of the businesses carried on by them.
In November 1930, the board of the new company determined that they would resort to the uncalled capital of the promoting companies. They proceeded under the agreement to require each of the two companies to call up 1s. upon its share capital issued not fully paid up. Both companies complied with the requirement, but the Citizens and Graziers' Co refused to pay over the proceeds of its call. In July 1932, in order to make partial provision for an actuarial deficit of a considerable amount appearing from a valuation of its policy liabilities, the new company called upon the promoting companies each to make a further call of 1s. a share upon its uncalled capital. This time the Citizens and Graziers' Co refused to make the call. Thereupon the new company instituted a suit for specific performance of the agreement. The Citizens and Graziers' Co defended the suit upon grounds of illegality and ultra vires. Harvey C.J. in Eq., who heard the suit, overruled the defences and made a decree declaring that the Citizens and Graziers' Co is bound to pay to the plaintiff, the new company, in return for fully paid shares of an equivalent face value, an amount equal to the net amount realized for the call made, and to make a further call of 1s., upon its contributing shares, and to pay over the net proceeds, and ordering payment of the net amount of the first call already received or afterwards received.
From that decree the Citizens and Graziers' Co Now appeals.
In support of the appeal reliance is placed upon the absence of sanction by the Supreme Court of Queensland. It is said that it is unlawful without that sanction to carry out the agreement in the State of Queensland, and that an agreement, fulfilment of which is illegal under the law of one of the places of performance, will not be specifically enforced, wholly or in part, even in the forum of the place where the contract was lawfully entered into. The first difficulty encountered by this contention lies in the Queensland statute itself. Section 4 of The Life Assurance Companies Act of 1901 provides what in the Act, unless the context otherwise indicates, shall be the meaning of the word "company." So far as material it is "any person, or persons, corporate or unincorporate,... who issues or issue or is or are liable under policies of assurance upon human life within Queensland." The Commonwealth Society, it is conceded, did not issue and was not liable under policies of assurance upon human life within Queensland. Section 30 contains the following sub-sections:
- (1)
- When it is intended to amalgamate two or more companies, or to transfer the life assurance business of one company to another company, the directors of any one or more of such companies may apply to the Court by petition to sanction the proposed arrangement.
- (5)
- No company shall amalgamate with another company, or transfer its business to another company, unless such amalgamation or transfer is sanctioned by the Court in accordance with this section.
- (6)
- This section shall not apply to any case in which the business of any company which is sought to be amalgamated or transferred does not comprise the business of life assurance.
If the definition of "company" applies with no qualification to sub-ss. (1) and (5), it is apparent that the transaction does not fall under the restraint which the provision imposes. For one of the two companies, the transferee, is not a company within the definition. Both the definition of "company" and the provisions of the sub-sections are adapted from the English statute of 1870. Two reasons are, or may be, relied upon for treating the definition of "company" as not entirely applicable. The first is that it would be inconsistent with the evidence policy of the legislation to confine the operation of the section to transactions between companies both of which issue or are liable under policies of assurance upon human life in the State. This ground will not, in my opinion, support the burden placed upon it. The general policy of the provision is sufficiently plain. But, at the point of dispute, namely, what territorial limit the Legislature intended to adopt in its actual application, there is little guidance to be found in the nature of the policy. What is clear is that, in framing s. 30 (1) and (5), the draftsman relied upon the definition; for the sub-sections use the simple word "company" to describe the persons and bodies whose conduct is regulated. Without the definition, there would be no reference to an individual and no reference to life assurance. Again the words of sub-s. 1 are "two or more companies" and the territorial restriction contained in the definition of "company" must be treated as applying either to all or to none of the "two or more" to which the word extends. Then the English Act of 1870, upon s. 14 of which s. 30 of the Queensland Act is based, enacts, without providing for qualification by context, that in that Act "company" means any person or persons corporate or unincorporate... who issue or are liable under policies of assurance upon human life within the United Kingdom." The Queensland definition, which is simply adapted from the English, should have the same effect. It is, perhaps, worth adding that an analogous contention in relation to the application of the definition of "company" in s. 285 of the English Companies (Consolidation) Act 1908 to s. 192 was rejected by Eve J. in Thomas v United Butter Companies of France Ltd, [F14] see pp. 489-491. The second of the reasons suggested for rejecting the definition of "company" lies in sub-s. 6 of s. 30 which, at first sight perhaps, seems unnecessary if the definition applies and restricts "company" to life assurance company. But the object of sub-s. 6 is to exclude from the operation of s. 30 transfers or amalgamations of departments of insurance other than life, although conducted by life companies.
For these reasons I think the transaction now in question did not require the sanction of the Supreme Court of Queensland.
It thus becomes necessary to consider the defence of ultra vires. In effect, this defence is put upon the ground that so much of the agreement as purports to confer upon the plaintiff (the new company) rights in respect of the uncalled capital of the Citizens and Graziers' Co is beyond the powers of the latter company or of its directors. Among the objects contained in the memorandum of association of the Citizens and Graziers' Co is the familiar clause, taken from Palmer's Company Precedents, 13th ed. (1927), vol. I., p. 499, "to amalgamate with any other company having objects altogether or in part similar to those of this company". This object, either by itself or in combination with the wide incidental powers expressly taken in the memorandum, is relied upon as a complete authority for the entire transaction. Much has been said of the vague and indefinite meaning of the word "amalgamate" as a description of a transaction between companies. Lord Hatherley, Lord Lindley, Lord Davey, and Lord Wrenbury have confessed their inability to define it (In re Bank of Hindustan, China and Japan Ltd ; Higg's Case, [F15] at p. 622; In re Empire Assurance Corporation; Ex parte Bagshaw, [F16] at p. 347; Wall v London and Northern Assets Corporation; [F17] New Zealand Gold Extraction Co (Newbery-Vautin Process) v Peacock; [F18] In re the Joint Application of the Great Northern Railway Co and the Great Central Railway Co, [F19] at p. 425). The expression is figurative and is a commercial rather than a legal description. The general notion conveyed by "amalgamation" is the combination of separate things or separate collections of things into a single uniform or homogeneous whole. In spite of the commercial origin of the use of the terms "amalgamation," "reconstruction," and "reorganization" as descriptions of company transactions, their meaning is not to be ascertained by considering the lay understanding of the expressions, but rather by referring to text writers upon company law, who are specially conversant with the subject (per Chitty J., Hooper v Western Counties and South Wales Telephone Co, [F20] at p. 18). "An ordinarily prudent member of the public unacquainted with company law, would if he were also ordinarily modest, hesitate before he put a meaning to the words" (1).
Text writers concur in treating amalgamation as a description of transactions which, however carried out, result in the substitution of one corporation for the two or more uniting companies, and the conversion, in effect, of the separate sets of members of the uniting companies into a single set of members of the one corporation. Lindley on Companies, 6th ed. (1902), vol. II., p. 1202, said:
"Amalgamation with another company must involve a complete change in, if not a destruction of, one at least of the companies intending to amalgamate."
Palmer's Company Precedents, 13th ed. (1927), vol. II., p. 1088, says:
"It is a popular phrase, and, as such, has for many years (see first edition of this work, published in 1877) been used to describe various transactions differing considerably in detail, but generally falling within one or other of the following heads:
- (a)
- The transfer of the undertaking of an existing company or of several existing companies to another existing not newly formed company, of which all the members of the transferring company or companies become or have the right to become members, and the subsequent dissolution of the transferring company or companies.
- (b)
- The transfer of the undertaking of two or more existing companies to a new company formed to take over the same, of which all the members of the transferring companies become or have the right to become members, and the subsequent dissolution of the transferring companies."
In Wall v London and Northern Assets Corporation, [F21] Chitty L.J. says:
"In strictness I do not understand how you can amalgamate two corporations having each a separate existence. It has been suggested... that one way (and I agree... so far) is to form a third company. That is not, in any strict sense, an amalgamation of two companies. The two companies sell and transfer their undertakings to a new entity-that is, a third company established for that purpose; and then the two companies which are said to be amalgamated with this new entity vanish out of existence and wind themselves up and disappear."
Here, again, the transmutation of the former incorporated bodies into one is emphasized. The same thing is implicit in the better known description of amalgamation by Buckley J.:
"There you must have the rolling, somehow or other, of two concerns into one. You must weld two things together and arrive at an amalgam-a blending of two undertakings. It does not necessarily follow that the whole of the two undertakings should pass-substantially they must pass-nor need all the corporators be parties, although substantially all must be parties. The difference between reconstruction and amalgamation is that in the latter is involved the blending of two concerns one with the other, but not merely the continuance of one concern" (In re South African Supply and Cold Storage Co [F22] ).
The union of shareholders, which amalgamation involves, is, of course, not concerned with the members of the combining corporations as persons. It is the reorganization of share capital that matters. The replacement of two separate systems of share capital by one appears to be required before a union of two companies limited by shares can justly be called an amalgamation of the companies. In the process of reorganization, classes or divisions of shares, or amount of share capital, in one or other or both of the old companies may find no representation in the one system of capital which emerges. But the substantial result must be to reduce for practical purposes two or more organizations of capital to one, and two or more incorporated companies to one. The amalgamation to which the clause in the memorandum refers is not a mere combination of businesses separately conducted, but an amalgamation of companies. There is no context to enlarge the meaning of the expression. To accomplish such an amalgamation, it seems necessary, either to consolidate the constituent elements of the old companies into a new one, or to merge in one of the old companies the constituent elements of the other. Possibly a transaction may be an amalgamation although the corporate existence of the consolidating companies, or of the merged company, may be continued for some special and definite purpose. But the continuance of two corporations under separate control, organized with their separate systems of share capital and capable of independent activities, appears to me inconsistent with an amalgamation of more than their existing enterprises.
In the present case, there is not even a complete amalgamation of undertakings. No doubt, the desire of the promoting companies was to give the new company as much beneficial interest as they safely could in the Queensland life business of the Citizens and Graziers' Co To this end clause 6 provided that the new company should also purchase the right to the future profits of the Citizens and Graziers' Co arising from its life business in Queensland, and divisible amongst its shareholders, for a sum to be fixed by two named persons, respectively directors of the promoting companies, and that the sum should be payable by the issue of fully paid up shares in the new company to nominees of the Citizens and Graziers' Co who should hold them upon trust, (a) while that company carried on the Queensland life business, to pay it the dividends received upon the shares and, (b) if that company ceased to carry on such business, or if it became unlawful to pay over the profits, to dispose of the shares under the direction of the new company, and hold the proceeds upon trust for it. The effect of clauses 14 and 19 of the agreement is to allow the Citizens and Graziers' Co to call up any of its capital for the time being uncalled to meet liabilities incurred in the Queensland life business, and to enable the new company, if legislative changes in Queensland permit a non-mutual company to commence the transaction there of life business, to acquire the life business of the Citizens and Graziers' Co by increasing the price fixed under clause 6 by the amount of any calls so made together with PD100, all to be satisfied in shares of the new company. But the desire to make the new company the beneficial owner of the Queensland life business was overshadowed by the fear of infringing upon Queensland law. The agreement, therefore, begins with an elaborate cautionary clause, which excepts from the purchase and taking over so much of the undertaking of the Citizens and Graziers' Co as relates to its life assurance fund and operations in Queensland, requires that its life business shall continue to be carried on by it under its sole control as if the agreement had not been made, forbids the new company, while the present legislation remains in operation, to commence or carry on life assurance business in Queensland, and directs that the agreement shall be read and construed so as to give full force and effect to the clause, and that, where necessary for the purpose, other clauses should be deemed to be subject to it. It is true that in Wall v London and Northern Assets Corporation, [F23] and In re South African Supply and Cold Storage Co, [F24] although assets were excepted from the undertakings transferred, the transactions were held to be amalgamations. But, in the first case, the assets excepted consisted of shares in the transferee company in which the transferor was to be merged, and, in the second, of a small sum retained to cover liquidation expenses.
The Queensland life business appears to have formed an important part of the enterprise of the Citizens and Graziers' Co, and the agreement prevents a blending of that business under one control and management, but leaves it to be carried on by the promoting company on its independent responsibility and at the risk of its uncalled capital. Apart from the incompleteness of the union of businesses, the transaction not only does not involve the replacement of two corporate bodies and two systems of share capital by one, but it is inconsistent with it. The shares in the new company are issued to the promoting companies or their nominees. The nominees may not transfer them without the new company's consent. Without a liquidation, the promoting companies could not distribute them to their shareholders in exchange for their own shares. No liquidation is consistent with the agreement, both because the Citizens and Graziers' Co must carry on the Queensland life business, and because both companies must be in a position to call up capital as required by the new company. In fact the agreement contemplates the continuance of the promoting companies as two independent concerns, making separate profits or losses, and governed by different boards of directors and constituted by different sets of shareholders. The Citizens and Graziers' Co, under its memorandum of association, might, quite consistently with the agreement, proceed to carry on independently the business of a loan company, an investing company, a financial agency company, and, perhaps, even a land and building company. In these circumstances I do not think the transaction is an amalgamation within the object of the company which enables it to amalgamate with any other company having similar objects.
Apart from the power to amalgamate, the objects of the Citizens and Graziers' Co are sufficient to authorize the transaction in all respects, except in so far as it deals with uncalled capital. Among its objects are the following:
"To lease, sell, dispose of or otherwise deal with all or any property of the company."
"To promote any other company for the purpose of acquiring all or any of the property or liabilities of this company or for advancing directly or indirectly the objects or interests thereof and to take or otherwise acquire and hold shares in any such company and to guarantee the payment of any debentures or other securities issued by any such company."
"To sell any real or personal estate or property and the undertaking of the company or any part thereof for such consideration as the company may think fit and in particular for shares, debentures or securities of any other company having objects altogether or in part similar to those of this company."
"To enter into, contract or carry out and do all such other acts, matters and things as may be incidental or conducive to the attainment of all or any of the above objects or all or any objects of a like or similar nature."
"To enter into, carry on and execute all monetary and financial arrangements and do all matters and things which the company may think conducive to the objects aforesaid or the original objects of the company or any of them."
"To do all such other things as are incidental or conducive to the attainment of the above objects or any of them or such other things as the company may from time to time determine upon."
But the only object which refers to a dealing with uncalled capital is one enabling the company to borrow and secure money upon its property present and future, including uncalled capital.
The primary meaning of such expressions as "property of the company," "real or personal estate," and "property and the undertaking of the company" does not extend to uncalled capital. The liability of a member holding shares not fully paid up to contribute when called upon by the directors pursuant to the articles or in the event of a winding up may constitute a right or asset of the company, but it does not form part of its undertaking or of its property, and it is not an estate (Stanley's Case, [F25] King v Marshall; [F26] In re Sankey Brook Coal Co (No. 2); [F27] Bank of South Australia v Abrahams; [F28] In re Colonial Trusts Corporation; Ex parte Bradshaw; [F29] In re Streatham and General Estates Co; [F30] In re Russian Spratts Patent Ltd ; Johnson v Russian Spratts Patent Ltd; [F31] Re Andrew Handyside & Co [F32] ). It follows that the powers stated above which relate to the disposal of property and undertaking are in themselves insufficient authority for those parts of the agreement which deal with uncalled capital. I do not think any of the three "incidental" powers set out add enough to authorize what has been done. The subject matter of the other objects being thus fixed by definition, I do not think that the "incidental" objects do more than enlarge the capacity of the company to act in relation to that subject matter. Some clearer indication of intention to empower a disposition or other transaction affecting uncalled capital, and, consequentially, the position of contributing shareholders, appears to me to be needed. The agreement provides by clause 15 that the directors of the new company may from time to time as they consider necessary call on the promoting companies respectively pari passu to make such calls on uncalled capital as may be determined (which I take to mean determined by the new company's board). The clause proceeds to provide that the net sums realized from the calls shall be transferred to the new company which shall issue fully paid shares to the amount received.
The articles of association of the Citizens and Graziers' Co vest in the directors general authority to exercise the powers of the company, and I should think that if any special or particular object of the company covered a transaction with uncalled capital, as, for instance, the power to borrow does, the directors would thus be enabled to carry it into effect, notwithstanding that the articles confide to them the discretionary power of making calls. But some relevant power to deal with uncalled capital is necessary to confer upon the company authority to undertake contractually the obligations and submit to the control involved in the provisions of the fifteenth clause. I do not think the objects I have dealt with contain such a power. An attempt was made to support the clause as incidental to the following object:
"To take or otherwise acquire and hold shares in any other company having objects altogether or in part similar to those of this company or carrying on any business capable of being conducted so as directly or indirectly to benefit this company."
It was said that it was no more than giving an option to the new company to allot its unissued capital, and securing the amount which would become payable for the shares over the uncalled capital. I doubt whether the object, with the incidental power, would extend to such a transaction, but, in any event, it is not the transaction contained in clause 15, which gives rather an option over the uncalled capital of the Citizens and Graziers' Co, the price being payable in shares. In my opinion clause 15 of the agreement is not binding upon the Citizens and Graziers' Co This conclusion does not involve the consequence that the whole transaction is ultra vires. Clause 15 is a distinct provision and no other provision is dependent for its operation or effect upon clause 15. The shares of the new company to be issued in respect of the proceeds of the calls are a separate and complete consideration for the moneys receivable under clause 15. Its provisions operate only after the businesses have been transferred. There is much to be said for the view that clause 15 is severable. But the result upon this suit of the conclusion I have reached would be that it should fail.
In my opinion the appeal should be allowed with costs, and the suit dismissed with costs.